Worldwide: Spilling Secrets: The End Of Confidentiality In Offshore Financial Centres

Last Updated: December 12 2013
Article by Nadia Chiesa

The Cayman Islands, Nevis and the British Virgin Islands ("BVI") bring to mind images of turquoise waters, white sand beaches and...offshore bank accounts and corporations where the super wealthy stash their millions to avoid (and evade) taxes in their home countries. Formerly known as "tax havens", these jurisdictions, which are not limited to the Caribbean but include Switzerland and Hong Kong, among others, are now referred to as international financial centres or offshore financial centres ("OFCs"). OFCs have established significant financial industries which attract corporations and individuals from around the world by offering incentives such as low or no taxes, little to no financial regulation and perhaps most importantly, a high degree of privacy.

OFCs are a big business. The BVI, a chain of islands to the east of Puerto Rico and a British overseas territory, is home to 45 percent of the world's offshore companies, and its corporations outnumber its residents fourteen to one. It is estimated that there is approximately US$290 billion in American assets held in the Cayman Islands alone, where there are almost twice as many offshore companies as residents, and that figure rises to more than $1 trillion worldwide.

Secrecy laws: A defining feature of OFCs

OFCs are most frequently associated with tax evasion or other unlawful uses, although there are numerous legitimate purposes for setting up an offshore account or corporation. This reputation is due, in large part, to the very feature that makes OFCs so attractive: confidentiality of financial information. Nevis' Confidential Relationships Act protects a broad scope of confidential information related to financial or business interests located in the jurisdiction, which would include the identity of beneficial owners or the assets or property held by a company or in an account. The Act imposes serious penalties, including imprisonment, for divulging or obtaining or even attempting to divulge or obtain confidential information. A similar statute in the Cayman Islands, the 1976 Confidential Relationships (Preservation) Law, prohibits the disclosure of "all confidential information with respect to business of a professional nature which arises in or is brought into the Islands", although the act was amended in 2009 to permit the disclosure of information pursuant to a Tax Information Exchange Agreement ("TIEA"), a bilateral agreement permitting the exchange of information related to taxes and intended to combat illegal tax practices. Several OFCs have entered into these agreements but the Organization for Economic Co-operation and Development ("OECD") recently reported that several jurisdictions, including Switzerland, have failed to put into place the necessary legislation for the exchange of tax information. The BVI, which has tax exchange legislation in place, was rated as non-compliant with international tax transparency standards by the OECD for failing to apply that legislation properly.

John Doe, disclosure and data leaks: The end of the OFC?

The glory days of secret bank accounts and offshore corporations may, however, be numbered as recent developments including major data leaks, new tax reporting legislation, the US' Foreign Account Tax Compliance Act, and recent case law in the United States and Australia, for example, are eroding the confidentiality which has long been the hallmark of OFCs.

A "John Doe" summons is a powerful information-gathering tool employed by the Internal Revenue Service ("IRS") where it suspects a federal tax violation by unknown persons. The court will authorize the summons where: (i) the IRS can establish that it relates to a particular person or ascertainable class; (ii) there is a reasonable basis for issuing the summons; and (iii) there are no alternatives for obtaining the information.

Two recent orders made by the United States District Court for the Southern District of New York in November 2013 signalled the American government's current focus on tracking down American assets abroad – and the citizens who own those assets. In early November 2013, Judge Kimba M. Wood authorized the IRS to issue John Doe summonses against New York Mellon (Mellon) and Citibank NA (Citibank), which will compel the banks to divulge information related to suspected American tax evaders who hold accounts – and assets which have not been disclosed to the IRS – with Switzerland's Zurcher Kantonalbank and its affiliates. Just a week later, Judge Richard M. Berman authorized the IRS to issue similar summonses against five American banks, including JPMorgan Chase Bank NA, HSBC Bank USA NA and Bank of America NA, in order to collect information on American taxpayers with interests at The Bank of N.T. Butterfield & Son Limited and affiliated entities across the Caribbean, Europe and Hong Kong.

The recent New York orders followed a decision of an Australian court to allow the use of confidential documents related to a major tax case, despite a ruling by Justice Charles Quin of the Cayman Island's Grand Court in M.H. Investments and J.A. Investments v. The Cayman Islands Tax Information Authority which held that the release of the information was unlawful and in breach of the TIEA entered into between those two countries. The documents were protected by Cayman's confidentiality legislation because they pre-dated the TIEA, which permitted the disclosure of information for the taxable period beginning on 1 July 2012. The Australian court ignored Quin J.'s order that the documents be returned or destroyed, even acknowledging that use of the documents was in breach of Cayman laws.

These are just the latest examples in a growing line of cases dealing with the conflict between secrecy legislation in OFCs and court-ordered disclosure of otherwise protected information, which raise serious concerns about the future of the confidentiality in OFCs and more generally, judicial respect for the principles of comity. American courts have leaned towards ordering disclosure of confidential information in violation of foreign law and sanctioning parties for non-compliance with those disclosure orders.

The 2009 case of United States v. UBS AG, before the US Federal Court in the Southern District of Florida, was arguably the beginning of the end, at least for the secret Swiss bank account. A former UBS banker alleged that his employer had routinely set up offshore accounts to enable clients to evade American taxes, leading to an investigation of the bank by the US Department of Justice, which issued John Doe summonses for the production of confidential information related to thousands of American clients. The bank initially refused, citing Switzerland's bank secrecy laws which criminalize the release of financial account information. The Swiss government also opposed the John Doe summonses, which were so broad that compliance would constitute a breach of Swiss law, and asked the court to refuse to authorize the summonses on the basis of international comity. In early 2009, UBS entered into a deferred prosecution agreement, and admitted that its employees had been involved in using offshore accounts to defraud the US. Despite the Swiss confidentiality laws, UBS agreed to pay $780 million in fines and penalties, and reveal the identity of almost 5,000 American clients. The IRS later established its offshore voluntary disclosure program to encourage Americans to self-report previously undisclosed income from offshore accounts in order to avoid criminal prosecution.

It is not only foreign court orders which have threatened the confidentiality previously offered by OFCs. In early 2013, the International Consortium of Investigative Journalists ("ICIJ") obtained a computer hard-drive with 260 gigabytes of information about approximately 122,000 offshore companies or trusts, apparently from a whistleblower, and set out to publish this information. Partnering with media organizations around the world, including the CBC and The Guardian, the ICIJ, a Washington-based organization of investigative journalists working in more than 60 countries, publicly identified more than 130,000 people in 170 countries with offshore interests. In the wake of this major data leak, Canada, the US and the UK, among others, announced crackdowns on citizens with undisclosed assets abroad.

The issue of OFCs and tax evasion was at the top of the agenda at this summer's G8 Summit, where leaders signed the Lough Erne declaration which included a commitment to "fight the scourge of tax evasion", in part by facilitating the exchange of tax information between nations.

All eyes on OFCs: What these recent developments mean for OFCs and clients with offshore accounts or corporations

While it is unlikely that these developments foretell the end of the offshore financial industry, often the principal and most profitable industry in many of these jurisdictions, they do raise new concerns for individuals and corporations with offshore assets, and the professionals who advise them. The Canadian government, and others, are rolling out strategies to target tax evaders. Increased scrutiny of citizens with assets abroad can be expected, so it will be essential to ensure that offshore assets remain onside with domestic tax requirements. Clients must also understand that privacy is no longer guaranteed, as the trademark confidentiality once promised by OFCs is being eroded by bilateral information exchange agreements, foreign court orders and data leaks.

These developments may also lead to litigation in OFCs seeking to enforce the penalties and sanctions in their respective confidentiality legislation, especially if foreign courts continue to ignore the domestic legislation and court orders in offshore jurisdictions.

It is clear that the legal landscape in which OFCs operate is in transition, and individuals and companies with interests in these jurisdictions as well as their legal advisors will be keeping a close watch on the evolution of OFCs.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
7 Dec 2017, Webinar, Toronto, Canada

FEX Members Jeff Noble, BDO, and Caroline Abela, WeirFoulds LLP, invite you to a complimentary webinar series titled: All About Shareholders.

15 Dec 2017, Seminar, Toronto, Canada

WeirFoulds Partner Caroline Abela will instruct The Advocates' Society program, "Leading Your Case: Opening Statements and Examination-in-Chief".

30 Jan 2018, Seminar, Toronto, Canada

WeirFoulds Partner Marie-Andrée Vermette will instruct The Advocates' Society program, "Cross-Examination: Strategies for Success".

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions